Explorer of all trades, master of sunsets. Write about blockchains, the future, music & life.

May 14, 2016

>$100m raised for a global, decentralized fund. Will TheDAO succeed?

If you accept the nature of the firm to understand why organisations exists, it is to reduce transaction costs vs the outside (or the “market”).

The resources usually include mental costs, time & money. Understanding the same frame of reference and not having to include the whole “market” in one’s head, it reduces the cost amongst people to more actively make good decisions. The goal is to have the right people together vs the market. In terms of pooling money, it can induce economies of scale & potential to invest in larger projects.

At the end of the day, by organising together, the resources within an organisation (people, money, etc) should perform better vs the market. Usually investment funds operate on the premise that it can more effectively decide how to allocate capital vs the market. It has a supposedly *better* understanding about something like tech or real estate.

So, given the fact theDAO consists of relatively anonymous decision-makers across the globe, would it be capable of making good decisions about proposals? Pooling the capital and giving it to these stakeholders to manage, assumes that these stakeholders would make better decisions than other stakeholders (or the market) in where to allocate capital.

On the surface, this does NOT seem to be the case. Because there’s no clear goal on what to invest in, it has attracted a diverse crowd of people, with no clear way on how to more effectively gather this information from the crowd, than simply through a process of educating/lobbying & voting. There’s no obvious expertise, vs in something like an investment fund where visibly knowledgeable people have been gathered about a certain sector of the financial industry that can hopefully make better decisions vs the market. There might be those stakeholders, but because they are anonymous their only way to inject this information is to convince others or vote (which seems slow & inefficient and very similar to just being a market).

Thus. On paper, it is not clear what & how it solves the transaction costs vs the market. More defined directions/goals might have attracted people who can more effectively make good decisions about that direction.

But. The fact exists. It has raised over $100m worth of funds and has to try to allocate them more effectively than the market. There are however some parts to theDAO that has advantages. The questions are: are they material enough to solve enough of the tx costs vs the market?

It attracts Ethereum projects in the short term. Investment firms such as YC & A16Z attracts great tech projects for investment because they have a history of betting on “good” ideas. Thus, in the short term, most of the projects that theDAO will attract are Ethereum-related projects: improving the ecosystem as a whole. If you believe in the potential of Ethereum, there’s a lot of nascent ideas waiting to be built still that could in itself be revolutionary and by attracting these ideas could be a boon for theDAO. It will be a while before it attracts something like your uncle’s corner bodega.

Open-Source-Fund-As-A-Platform. Perhaps the most important part. It can more rapidly grow/morph than any other type of fund. People have already built their own interfaces and wikis, something typical of OS projects. It can build on new kinds of governance models such as a futarchy or delegative voting, that’s potentially better able to eke out expert decision-making on proposals.

It can more rapidly allocate funds vs traditional investments. If the crowd decides in 2 weeks whether it is a good idea or not, the funds are sent.

It can do substantially more flexible investment schemes. Could be a cut-per-sale, or equity investment, or even something like putting Ether as collateral for a stablecoin or staking it in the future with Proof-of-Stake. It is not restricted in how it could spend its funds.

It’s a fund attached to the rest of the Ethereum ecosystem, meaning it can engage automatically without an intermediary in other parts of it: like for example being a market maker on Gnosis prediction markets.

Thus, given these potential benefits, it seems more the case that it could become successful more likely in the medium to long term. The short-term trough needs to be weathered through. It has to show it can 1) make good decisions with a crowd that’s not necessarily aligned on what’s a good idea, and 2) stay around long enough so that the medium-to-long-term innovations attach onto it.

It has at least time & money on its hands. Even if 90% of capital goes away, it still has 10$m to work with. It’s an unprecedented experiment.